06/22/2010 05:12 am ET | Updated May 25, 2011

Why Hulu Will Start Charging Subscription Fees

Back in October of 2009 Chase Carey -- News Corporation's deputy chairman -- announced that Hulu would start charging subscription fees beginning in 2010:

I think a free model is a very difficult way to capture the value of our content. I think what we need to do is deliver that content to consumers in a way where they will appreciate the value. Hulu concurs with that, it needs to evolve to have a meaningful subscription model as part of its business.

-Chase Carey, News Corporation Deputy Chairman

Well, the time has come and according to the Los Angeles Times -- Hulu will start testing a subscription model in May. Under the subscription model the five most recent episodes will be free. Now, if viewers want to get an all-inclusive collection of shows the subscription would be $9.95 a month, for Hulu Plus.

Let's be honest for one second -- Hulu is a business and it needs to make money. This is a sentiment that is supported by its joint owners -- Fox, NBC, ABC and Providence Equity Partners. In Hulu's defense they were profitable in 09. They reported over $100 million in revenue. Additionally, they have been profitable since 4Q09. This sounds like great news but it's not. Hulu's content partners get anywhere from 50% - 70% of all ad sales. Let's not forget those operational costs -- like streaming costs, billing costs and customer service costs. These are costs all covered by those Hulu profits. That $100 million is now looking a bit anemic.

Listen, online video content consumption is increasing at a feverish rate. This is in-part due to the increase in population of smartphones (45.4 million in the U.S.). I also believe that in 2010 online video consumption will enjoy another significant boost in rankings; from tablet computers. I base my assumption on how well the iPad has sold in the U.S -- over 500, 000.

According to comScore's February 2010 online video rankings:
  • 174 million U.S. Internet users watched online video during the month
  • Google Sites ranking as the top video property with 11.9 billion videos
  • Hulu ranked second with 912.5 million videos
  • Microsoft Sites ranked third with 623 million
It's obvious that the demand is there but someone needs to build a revenue model that will produce income. Will the $9.95 for Hulu Plus be the revenue model that will produce income? Many in the industry are saying no -- I am saying no. What are your thoughts on the matter?